ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE

ECONOMICS PROGRAM UNIT

MICROECONOMICS ASSIGNMENT (20%)

I. Discuss the following concepts

a. Why are AVC and ATC curves U- shaped in the short run?

b. Which stage of production is efficient region of production in the short run? Why?

c. If the ATC curve is continually declining, what does this imply about the MC curve? Explain your answer.

d. The average variable cost curve and the average total cost curve get closer to each other as output increases. What explains this?

e. Accounting rules determine a firm's ''profits'' for tax- and dividend-paying purposes. So why any firm should be concerned about its economic profits? Specifically, why should a firm be concerned about the opportunity costs of the people who invest in it when those costs never enter into its accounting statements?

f. Two students are preparing for their micro exam, but they seem confused: Student A: ''we learned that demand curves always slope downward. In the case of a competitive firm, this downward sloping demand curve is also the firm's marginal revenue curve. So that is why marginal revenue is equal to price.'' Student B: ''I think you have it wrong. The demand curve facing a competitive firm is horizontal. The marginal revenue curve is also horizontal, but it lies below the demand curve. So marginal revenue is less than price.'' Can you clear up this drivel? Explain why neither student is likely to warrant a grade commensurate with his or her name.

g. Why the marginal product of labor is likely to increase initially in the short run as more of the variable input is hired?

h. You are an employer seeking to fill a vacant position on an assembly line. Are you more concerned with the average product of labor or the marginal product of labor for the last person hired? If you observe that your average product is just beginning to decline, should you hire any more workers? What does this situation imply about the marginal product of your last worker hired?

i. Isoquants can be convex, linear, or L-shaped. What does each of these shapes tell you about the nature of the production function? What does each of these shapes tell you about the MRTS?

j. Assume that the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing? Explain.

k. Why would a firm that incurs losses choose to produce rather than shut down?

l. Explain why the industry supply curve is not the long run industry marginal cost curve.

m. Why do firms enter an industry when they know that in the long run economic profit will be zero?

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